Impact of the TARP Financing Choice on Existing Preferred Stock

61 Pages Posted: 4 Aug 2012

See all articles by Duane Stock

Duane Stock

University of Oklahoma - Michael F. Price College of Business

Dong Kim

Ohio Northern University - James F. Dicke College of Business Administration

Date Written: July 14, 2012

Abstract

The October 14, 2008 TARP program mandated a forced issuance of TARP preferred stock by the largest U.S. banks. Soon after, many smaller banks were not forced but chose to issue TARP preferred stock after being approved for issuance. We investigate the impact of TARP preferred issuance upon bonds, preferred stock, and common stock. In particular, we focus upon two different types of outstanding preferred stock. These two different types of preferred stock are (1) trust preferred stock, which is senior to TARP preferred stock, and (2) non-trust preferred stock, which has equal claim to TARP preferred stock. We present competing theories for expecting that trust preferred should enjoy greater or lesser returns relative to non-trust. Consistent with the priority rule theory, but inconsistent with the default theory, we find that trust preferred enjoyed greater benefits from TARP issuance than did non-trust preferred for both forced and non-forced banks on the October 14 TARP announcement date. In contrast, there is no clear priority rule effect on the approval dates for non-forced banks.

Keywords: priority, TARP, preferred stock, bankruptcy

JEL Classification: G32, G34, G39

Suggested Citation

Stock, Duane and Kim, Dong, Impact of the TARP Financing Choice on Existing Preferred Stock (July 14, 2012). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2120936

Duane Stock (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

307 W Brooks
Norman, OK 73019
United States

Dong Kim

Ohio Northern University - James F. Dicke College of Business Administration ( email )

Ada, OH 45810
United States

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